Coming out of this crisis, annual consumer price inflation in New Zealand, and most other countries, reached rates not seen since the inflation-targeting era began more than a generation ago.
Inflation in New Zealand has slowed significantly recently. But it remains higher than both pre-pandemic levels and the Monetary Policy Committee’s (MPC’s) 1 to 3% target range.
Inflation spiked higher during the pandemic on a mix of supply and demand-related factors. Shortages of labour and materials, in an environment of high demand, were key in driving up inflation.
“Compared to other countries, tightness in the labour market, brought about by the border closure, played an important role in generating inflation in New Zealand,” says Mr Conway in an online webinar from Wellington.
“Looking ahead, there are some remaining challenges in bringing inflation sustainably back to target, with some risks and uncertainties attached,” says Mr Conway.
Our recent research highlights that emerging spare capacity in the economy will feed through into lower domestically generated inflation.
“Lower inflation expectations of firms and households will help reinforce the slowdown in inflation, with less pressure to raise prices and demand higher wages. As inflation continues to fall, businesses will be less able to make large price increases, which will help lower inflation persistence.
We are using these research insights to help guide our monetary policymaking under flexible inflation targeting.
The extent to which broad momentum in domestic inflation continues is a key upside risk.
This is partially offset by the potential for a quicker fall in inflation expectations and a more rapid passthrough of weaker demand to prices. Overall, a period of restrictive policy is necessary to give us confidence that inflation will return to target over a reasonable timeframe,” he says.
Download the speech (PDF, 1 MB)
